Valuation for Mergers, Buyouts, and Restructuring, Second Edition

Chapter 12

Acquisitions in Developed and Emerging Markets

12.1 THE GLOBAL CAPITAL MARKET

A number of developments in international trade and finance have contributed to the integration of capital markets: Trade barriers have been lowered, capital controls have been removed in developed countries and many developing countries, and tax harmonization and treaties have reduced the impact of different tax rates on trade and investment. In addition, floating exchange rates and free convertibility have facilitated the international flow of capital, and transactions costs associated with foreign portfolio investment have fallen as a consequence of advances in information technology and competition. These developments have facilitated global diversification and contributed to a reduction of the cost of capital of corporations. This is so because wider diversification reduces the standard deviation of portfolio returns beyond the level attained in a local market and reduces the risk premium required by investors. On the other hand, globalization makes stock markets around the globe move together and that offsets in part the gains from diversification.

In this chapter, we examine procedures for valuing acquisitions in developed and emerging capital markets.

12.2 TRANSLATING FOREIGN CURRENCY CASH FLOWS

Consider a U.S. company planning an acquisition in Germany. The usual valuation procedure would produce a forecast of the expected free cash flows (FCFs) of the target in euros, as shown in ...